The Economy Has Been Great Under Biden. That’s Why Trump Won.

These are not the only examples of recessions that were good for Democratic candidates. John F. Kennedy was chosen in 1960, during the 1960–61 recession. Jimmy Carter became president after the 1973–75 recession. Bill Clinton won shortly after the 1990–91 recession. And they are not coincidences, according to our model.

In fact, the same pattern has held for all three presidential elections since 2015, when our data ended. In November 2016, when the economy was doing well, the Republican candidate, Donald Trump, was elected. In November 2020, during the COVID-19 crisis, voters preferred a Democrat, Joe Biden. This year, with the economy doing well again, the electorate went Republican. Summing up, all three elections that took place since we first wrote our model went exactly the way it predicted they would.

It indicated that the 2024 election would be won by the Republican candidate not despite the strong economy but precisely because of it. Our mechanism doesn’t rely on voters acting irrationally by ignoring the strength of the economy and focusing only on the price of milk and eggs. In our model, everyone behaves rationally, and what matters to voters is simply the parties’ opposing take on taxes.

In general, Democrats prefer high tax rates, and Republicans prefer low ones. When electing one party or the other, voters expect taxes to rise or fall. According to our calculations, the ratio of taxes to GDP rises by 0.44 percent per year, on average, under Democratic administrations and falls by 0.3 percent per year under Republican administrations. That’s a spread of 0.74 percent per year, which is highly significant.

Key to our findings is how voters feel about risk. We argue that when the economy is weak, Americans become more risk averse, and that’s why they favor the party that promises redistribution and social insurance—Democrats. During booms, by contrast, voters are more willing to take risks and therefore more likely to elect Republicans, who favor lower taxes.

We were, like many other people, still somewhat surprised by Trump’s win, because we don’t expect our simple model to explain voter behavior perfectly. The model assumes a single policymaker and ignores the interaction between various branches of government. Also, real-world Americans care about much more than just taxes—issues including abortion, immigration, social justice, wars, pronouns, and the candidates’ personal traits were also in the mix during this voting cycle. All of those could have, in principle, determined the outcome of the election.

If our argument holds, there’s also a lesson here for investors: Brace for lower-than-usual stock market returns under the new Trump administration. In finance, there’s a phenomenon known as the “presidential puzzle”—stock returns have been higher under Democratic administrations than Republican ones. Between 1927 and 2015, the period analyzed in our study, the average excess market return was nearly 11 percent per year higher under Democrats than Republicans.

Our model offers an explanation for this pattern. It’s not that Democratic presidents cause high stock returns; rather, they tend to get elected when risk aversion and expected future returns are high. The opposite is true for Republicans. According to our model, Trump just got elected because risk aversion is low due to the strong economy. And when risk aversion is low, so are expected future returns. Though the stock market spiked when the election results became clear, as the political uncertainty fades and the prospect of lower taxes sinks in, the stage is now set for lower stock returns during Trump’s term. This is not Trump’s fault—blame it on the strong economy under Biden.

Lubos Pastor is the Charles P. McQuaid Distinguished Service Professor of Finance and a Robert King Steel Faculty Fellow at Chicago Booth. Pietro Veronesi is deputy dean for faculty and the Chicago Board of Trade Professor of Finance at Booth.